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SUMMARY

Enhancing national competitiveness to sustain economic prosperity is at the heart of concerns in both the United States and China regarding climate change policy. These two countries are the largest emitters on the planet. U.S. firms and labor unions are concerned that if the United States passes domestic legislation and China does not, the Chinese will have a competitive advantage in pollution-intensive technologies and products. In turn, the Chinese government believes that it cannot agree to reduce its emissions while continuing to industrialize and develop economically, without technology transfer and financing from industrialized countries, especially the United States.

This paper explores the question of how to reconcile both countries' need for economic advancement, which is increasingly intertwined, with the imperative need to reduce greenhouse gas emissions (GHGs). How technology transfer occurs in practice, and how low-GHG technology transfer specifically might occur, based on prior experience with China, are examined. Particular focus is devoted to the following questions: How could U.S. firms benefit economically from low-carbon technology transfer to China? And, how could China acquire the technologies it needs to continue its rapid progress of industrialization in a more climate-friendly manner? The paper is aimed at finding a partial solution that would be likely to bring both the United States and China into an international climate change mitigation regime. The ideas proposed herein certainly do not resolve many other important challenges, such as how to provide for adaptation assistance, or how to help least-developed countries attract support for improving energy access in a climate-friendly manner.

A "deal" is proposed in this paper, whereby all major-emitting countries, including the United States and China, agree to reduce emissions through implementation of significant, mutually agreeable, domestic emission-reduction policies. To resolve the competitiveness and equity concerns, a proposed Carbon Mitigation Fund would be created. This proposed fund is contrasted with other existing and proposed mitigation funds and finance mechanisms.

SUMMARY FOR POLICYMAKERS

OVERVIEW

International climate negotiations are at an impasse because the world's two largest greenhouse gas (GHG) emitters, the United States and China, are unwilling to accept binding emission-reduction commitments. At the same time, each blames the other for its inaction. This paper proposes a global "deal" for breaking the deadlock in a way that reconciles both countries' economic concerns with the imperative of reducing emissions. The deal has two core elements: (1) All major emitting countries agree to reduce GHG emissions by implementing significant, mutually agreeable, domestic policies and (2) The largest industrialized-country emitters agree to establish a global Carbon Mitigation Fund that would finance the incremental cost of adopting low-carbon technologies in developing countries.

DISCUSSION

The United States and China account for nearly half of annual global carbon dioxide emissions. Without their participation, it will not be possible to stabilize GHG concentrations in the atmosphere at a level that would avoid the worst consequences of global climate change or to reach agreement on a workable international climate policy regime.

Both countries’ current refusal to adopt binding GHG commitments is rooted in economic concerns, but these concerns manifest themselves somewhat differently. In the United States, objections center on the competitive disadvantage to American industry—and the attendant potential for lost jobs and carbon "leakage" if domestic firms face GHG regulations while their competitors in China and elsewhere do not. The Chinese, by contrast, are concerned about the cost of GHG mitigation and its direct impact on their ability to industrialize and continue growing their economy. China and other developing countries also argue that it is fundamentally unfair to expect them to adopt similar mitigation commitments at this time given their far lower per-capita emissions, far poorer populations, and far smaller historic contribution to current GHG concentrations.

Transforming this shared concern about economic impacts into a shared interest in reducing the cost of low-carbon technology holds the key to resolving the current deadlock. The approach proposed in this paper combines mitigation commitments for all large emitters with increased cooperation on clean energy research and development, efforts to align incentives and reduce barriers to technology transfer, and assistance from rich countries to help finance the deployment of climate-friendly technologies in developing countries.

KEY FINDINGS & RECOMMENDATIONS

All countries with significant GHG emissions, including major industrialized countries like the United States and major developing countries like China, must adopt concrete, enforceable domestic GHG-reduction policies. This is essential to address concerns about competitiveness and carbon leakage and to create market incentives for the deployment of clean energy technologies.

To support the deployment of low-carbon technologies in developing countries and to give these countries an incentive to participate in global mitigation efforts, rich countries should provide financial assistance through a new Carbon Mitigation Fund. The Fund should: (1) finance the incremental cost of low-carbon technologies; (2) disburse funds on a first-come, first-served, technology-neutral basis; (3) leverage the private market and act like a commercial bank; (4) require applicants to utilize competitive procurement processes; (5) restrict direct financing to projects in countries with enforceable domestic GHG policies; (6) require new technologies to reduce GHG emissions at least a certain percentage below a pre-defined, country-specific baseline, and (7) encourage reasonable reductions in barriers to trade and investment in low-GHG technologies. Numerous other structural and operational details would, of course, still need to be worked out.

It is not clear how large the new fund will need to be—estimates of the incremental cost of deploying low-carbon technologies in developing countries range from tens to hundreds of billions of dollars per year—but contributions from major industrialized countries should reflect those countries' historic contribution to past emissions. Specifically, contributions should be proportionate to each country's cumulative per-capita emissions going back to a certain date with an adjustment for the size of its economy.

Countries should commit to greater international cooperation on energy-technology research, development, and demonstration and to reforming existing energy subsidies to remove supports for carbon-intensive fuels. No country has a stronger incentive to invest in clean-energy technology innovation than either the United States or China, and both countries could benefit from greater cooperation to reduce costs, share risk, and accelerate the development and deployment of improved technologies.

CONCLUSION

The principal advantage of the proposed deal is that it offers a way for the United States and China to step forward together in adopting a new international climate agreement sooner rather than later. This package addresses the competitiveness and leakage concerns of the United States by requiring China and other major developing country emitters to adopt enforceable domestic emission-reduction policies. At the same time, it expands global markets for low-GHG goods and services, thus creating a potential source of export growth and job creation for U.S. industries. For China and other developing countries, this package promises to greatly reduce or eliminate the incremental costs of low-GHG technologies, facilitate "technology transfer," and help achieve more sustainable development. It also satisfies their equity concerns by requiring the countries that are most responsible for historic emissions to make the largest financial contribution toward finding global solutions.